Incentives need not be monetary

Work by Swiss professor, Bruno Frey reinforces and analyses something that economists tend to forget: that monetary incentives don't always work. Indeed, they stand a good chance of undermining our willingness to do the right things for ethical and moral reasons. People perform valuable social or environmental services not only for monetary gain, but also because they enjoy doing them for their own sake, because they believe them to be the morally right things to do, or because they believe that their actions will advance some cause to which they are committed. These ‘intrinsic’ motives are qualitatively different from external, monetary incentives, and offering monetary rewards might ‘crowd out’ or undermine these less mercenary and more civic-minded motivations. Crowding out internal motivation can occur, writes Frey, because, monetary incentives can undermine people’s feelings of self-determination and self-esteem. Also, when external incentives are supplied, the ‘person acting on the basis of his or her intrinsic motivation is deprived of the chance to exhibit this intrinsic motivation to other persons.’

Not mentioned by Frey, but also plausible is that financial incentives can undermine the cognitive outlook that sees socially and environmentally beneficial services as worthwhile in their own right, rather than as a cost for which compensation and payments must be paid by taxpayers.Professor Frey looks in some detail at these circumstances.

Links to some of Professor Frey's work are here, and you might also be interested in this video talk on the same theme, by Barry Schwartz.

What do these findings mean for Social Policy Bonds, which at first sight seem to be entirely based on pecuniary incentives? It's important to note that, as Frey points out, the crowding-out effects are not always significant. In markets, which are based on relationships amongst essentially self-interested strangers, financial incentives as exhibited through the price effect do work as classical economics predicts. That is, they work to increase supply. And when (as they would be under a bond regime) external rewards are seen as recognition of the importance of, say, civic duty rather than an attempt to ‘buy’ one’s civic performance, they may well support, rather than undermine, moral and other intrinsic motivations. A bond regime could give bondholders incentives to further Frey’s research, exploring the relationships between financial incentives and civic performance. They could use this knowledge to minimise the costs of achieving targeted objectives by, for example, finding out when monetary incentives are least likely to supplant the intrinsic motivations of people who help achieve objectives, and concentrating their use in those circumstances.

Social Policy Bonds in this view, then, are not merely a system by which monetary incentives are funneled into the most efficient providers of public goods and services, but a 'meta-system' that motivates bondholders to find the best ways of encouraging socially beneficial behaviour - whether these be monetary or not.